The Reserve Bank of India (RBI) in India says interest rate increases are necessary to tame inflation and protect growth

The Reserve Bank of India (RBI) in India says interest rate increases are necessary to tame inflation and protect growth

By Swati Bhatt

MUMBAI (Reuters) – The Reserve Bank of India said on Friday that it will have to put monetary policy as a top priority to fight stubborn inflation and protect medium-term growth in the world’s fifth-largest economy.

Inflation in India has remained above the tolerance level of major banks since January, prompting them to raise interest rates by a total of 140 basis points in the current cycle. The bank is widely expected to rise by another 25 to 50 basis points at its next meeting at the end of this month.

“At this critical juncture, monetary policy has to play the role of the nominal anchor for the economy as it charts a new growth path,” the Reserve Bank of India said in an article on the state of the economy included in its monthly bulletin.

“Preloading monetary policy actions can keep inflation expectations firmly anchored and reduce the sacrifice of growth in the medium term.”

The Reserve Bank of India (RBI) said its August 2022 inflation reading of 7% is in line with its expectations that inflation peaked in April and will reluctantly decline over time.

The bank said there was a resurgence in food price pressures, mainly caused by grain, even as fuel and basic components such as transportation and manufacturing provided a modest measure of comfort.

“We maintain our view that inflation momentum should ease in Q3 and turn moderately negative in Q4. With underlying effects favourable in the second half of 2022-2023, inflation should moderate, despite upside risks in the air. .”

The Reserve Bank of India said aggregate demand in India is strong and poised to expand further as the festival season approaches, while domestic financial conditions remain supportive of the growth impulses.

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It also expected the country’s current account deficit to remain within 3% of GDP in the current fiscal year until March 2023.

“With portfolio inflows returning and foreign direct investment remaining strong, this deficit regime can be financed significantly,” the report said.

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